If you have been paying your mortgage for at least a third of your amortization period, no matter how many times you’ve renewed, it’s likely that you have built up significant equity in your home – the difference between its value today and the principal you still have due on the loan. The first few years of a mortgage make it tough to build equity quickly if you just make the regular monthly payments because most of each payment goes to paying off the interest on the loan.
As time goes by, though, and you build up equity – and as your house appreciates in value – a home equity mortgage can make a lot of sense. There are a number of ways that you can use the equity you have built up to knock out other financial goals. Let’s take a look at some of the most common ways that people put their home equity to work for them, and also consider whether private mortgage lenders make sense for your situation.
Real Estate Investing
A 2023 study published in the Toronto Globe and Mail showed that investors account for 30 per cent of the home buying in Canada. That means that almost one out of every three home purchases do not to someone who plans to live there but to a person or entity adding that home to a portfolio. It makes sense, too – the average return on real estate in Canada falls between five and seven per cent per year (although this varies fairly widely by location).
If you can get a decent home equity mortgage rate, turning that into an investment in real estate can make a lot of sense. Whether you buy into a real estate fund or use that money to invest in a single property, either by yourself or as part of a group, depending on market conditions, the profits can make that loan make sense. This can really be a game-changer for you if the area where you live isn’t appreciating as quickly as areas where you can invest, then the dollars you have sitting in your primary residence can do a lot more for you as an investment.
If you are moving from one home to another and need the kind of bridge financing Canada lenders provide, you can also use the equity that you have built up in an investment property to help yourself out. While you will have to pay interest on the home equity financing, it’s likely less than what you would pay for the bridge financing Canada lenders offer.
Home Renovation
Another way for you to help your home appreciate is to turn the money you have sitting in equity into a renovation. Sometimes it is possible to plan renovations well ahead of time, such as when you choose to update your kitchen or master bathroom – or to add a second floor. Updating your home in this way can pay off today in an improved quality of life inside the home as well as down the road when it comes time to sell.
At other times, renovations come when they are least expected. Whether you’ve been hit by a home fire, discovered black mold inside the walls, or had a massive leak open up and turn your kitchen or bathroom into a major mess, if you need to make major changes to your home as a result, your home equity can help you out. If you have the equity built up but aren’t in the best position with your credit score to make the renovations you need, when you need to make them, that’s when private mortgage lenders can come in and help you fill the gap.
Loan Consolidation
If you have tens of thousands of dollars in credit card debt, it’s likely that you are paying that debt off at an interest rate that is three or four times higher than it would be if you consolidated those debts and used home equity to pay them off. If you can get a home equity loan or HELOC (home equity line of credit) at 7 or 8 per cent, your interest expense will be significantly lower than it will be if you keep paying off those credit cards as they stand.
If your credit card interest rates are high enough, working with private mortgage lenders can make a difference here as well. Their interest rates are higher, because they are working with borrowers who have lower credit scores and represent a higher level of risk, but if you can cut your interest rate in half by tapping your equity, that can be a smart decision.
Business Loan
Do you have a business that needs some funding? You can lend your business the money, pay yourself back, and then claim the interest as a deduction for your business, depending on applicable federal and provincial tax laws. So even though you might have an interest rate approaching 10 per cent with your home equity loan, you can lend your business the money at a rate lower than you would get on your business credit cards, pay yourself back over time. You will turn out to be a much cheaper lender than any bank, credit union or credit card you will find out there.
Education Funding
One constant these days is the rising cost of college tuition. Whether you’re sending your children off to college or considering graduate school for yourself, tuition and fees are going to cost you. Many Canadians have put significant savings away knowing that their kids are heading to college, but they also find that costs have increased so quickly that they have outstripped their savings.
Student loans are available, of course, but if you are in a position to keep your children from entering the career world without a hefty loan payment eating a hole in their budget, wouldn’t you want to do that? A home equity loan will likely come with a lower interest rate than unsecured student debt, so even if you ask your children to help you make the payments after they have graduated and found a job, their cost over time will be less if the interest rate is lower.
Retirement Financing
As you approach retirement, you may have even paid your mortgage off in full. That takes the pressure of a mortgage payment out of your budget, but it also means that you live inside a giant savings account. It’s appreciating (on average) between 5 and 7 per cent per year, but if you’re a bit behind your retirement goals, could the difference between the interest you’d pay on a home equity note and what you could get investing the money be worth it? Depending on the type of fund you invest in, you can sometimes make as much as twice as much as your interest rate in the return on your investment. Obviously, you’ll want to keep a careful eye on the value of the investment, but the difference can help you retire earlier and more comfortably than you might have done simply waiting for your house to appreciate in value.
Investing
Even if you’re not at retirement age, taking equity out of your home and turning it into an investment can make a lot of sense. The difference in return is something that you can bank away after you’ve paid your equity back, setting up another stream of positive returns into your nest egg for the future.
Not everyone has the sort of credit score that makes home equity financing easy to get from a traditional lender, such as a bank or credit union. However, that doesn’t mean that you shouldn’t consider tapping that equity through a private lender. A question that we get a lot is, “Are private mortgage lenders safe?”
The answer, of course, is “Yes.” It’s true that you will pay more in interest. The fact that your credit score is lower means that you represent a higher degree of risk for a lender. That’s not always fair, because some borrowers have low credit scores because of the fallout of a divorce or unexpected illness as opposed to simple irresponsibility with obligations. However, just because you end up working with a private lender doesn’t mean you’re doing something risky. Instead, you’re getting a head start on your dreams by getting financing earlier than you would through a bank or credit union. Most private loans last no more than a year, and some of them allow interest-only payments while you get your credit score where a traditional lender will want it to be when the term ends.
When looking at leveraging Home Equity for Financial Goals, let your first stop be a Traditional Lender such as your Bank or a Broker that has good relationships with a variety of Traditional Lenders. If such options have been exhausted, but you require a short-term solution to achieve your objective, Amansad Financial can determine if a Private Mortgage is suitable short-term solution.